Enwave Corp

XTSX:ENW

Earnings Call Analysis

Positive Earnings Outlook and Strategic Growth

The company enjoyed a revenue increase to $11.3 million, with royalty revenues also up by $100,000. SG&A costs decreased by $1.7 million year-over-year, achieving a 39% gross margin and $379,000 of positive adjusted EBITDA. They wrapped up Q4 with $4.2 million in cash and no debt, alongside progress in winding down the NutraDried segment. A $770,000 net income was reported from discontinued operations, bolstered by a partial tax refund. Looking forward, the company forecasts double-digit royalty growth and potential incremental revenue of up to $1.5 million from new REVworx contracts in fiscal '24.

A Year of Modest Gains and Optimism for Future Growth

The company navigated through a year where it saw a modest revenue increase to $11.3 million, a slight $300,000 uptick from the previous year. This was bolstered by a $100,000 year-over-year increase in the royalty revenue, an important and recurring revenue source for the firm. The company successfully added six new license partners and sold four large-scale machines. It's worth noting that these sales do not follow a predictable pattern or seasonality, leading to some volatility in sales figures. Management remains hopeful for the continued growth of its royalty portfolio as they aim to capitalize on numerous large-scale opportunities in the pipeline with both new and existing partners.

Improving Efficiency While Managing Costs

The company demonstrated efficient cost management, reducing its Selling, General, and Administrative (SG&A) expenses by approximately $1.7 million from the prior year, contributing to a positive adjusted EBITDA of $379,000 in contrast to a loss of $681,000 in 2022. This reveals a concerted effort to manage non-revenue generating spending and boost profitability. However, despite these improvements, Q4 saw a gross margin decrease to 29% from 39%, attributed to a shifting production mix during the quarter.

Investing in Expansion and Capitalizing on Diverse Verticals

An optimistic outlook colors the company's view of fiscal 2024, with expectations of the royalty portfolio growing in size and diversifying across a range of market verticals, including fruit, vegetable, seafood, and dairy snacks, to name a few. Although Q4 sales were slower than desired, there's confidence in the potential for conversion of new companies into royalty-paying partners and expansion of established commercial relationships. Notably, the leadership is geared towards strategic spending to stimulate revenue while maintaining control over expenses. The current cash position, bolstered by a debt-free balance sheet, is expected to adequately support business needs, assuming sales meet internal forecasts. Shareholder value and investor outreach are also key areas of focus for the future.

Focus on Royalty Revenue Amidst Lower Quarterly Performance

While quarterly performance suffered a downturn, with Q4 revenues falling to $1.5 million—a 48% decline—royalty revenue emerged as a silver lining and a key area of attention for investors. Management emphasized the untapped potential of increasing manufacturing capacity not yet reflected in current royalties, projecting an uplift in royalty income as technology partners initiate their commercial launches. This anticipation of improved royalties aligns with the heightened volume from recently launched blue-chip partner products, which, if successful, could result in multiple new large-scale machine orders.

Streamlining Operations and Exploring Tax Benefits

The company streamlined its operations by selling off the NutraDried assets, contributing positively to the financials with a net income from discontinued operations of $770,000 for Q4, a significant enhancement from a $1.8 million loss in the same quarter of the previous year. This improvement was partly due to wind-down activities and a $0.5 million tax refund recognized in Q4—a fraction of the estimated total potential $1.2 million refund. Although there's no certainty around the receipt of the remaining potential tax refund, the company remains on a steady fiscal path, ending Q4 with cash and cash equivalents of $4.2 million and a net working capital surplus of $8.6 million.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. Welcome to EnWave Corporation's Q4 2023 Earnings Conference Call. My name is Darryl, and I will be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton and Dylan Murray, EnWave CFO.

[Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website at www.EnWave.net.

Now I would like to turn the call over to EnWave's CEO, Mr. Brent Charleton. Sir, please proceed.

[Brent Charleton, executive]

Thanks very much, and happy holidays to everyone. Greetings to all of you who have joined us today to discuss EnWave Corporation's Q4 results as well as our fiscal year 2023 performance and fiscal 2024 outlook.

Now consistent with our past quarterly earnings calls, the information we will present today contains forward-looking information that is based on our management's expectations, estimates and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars, unless otherwise noted.

EnWave remains at the forefront of vacuum-microwave drying innovation and commercialization. We've built a strong foundation of technology partners throughout the world that are holistically increasing the number of REV-dried products now being sold to consumers in more than 25 countries. Our royalty portfolio is growing, an indication that many of the individual royalty streams are also expanding, not just the number of partners in our portfolio. This momentum continues into fiscal 2024 as we potentially could see robust growth on an improvement in installed capacity of REV machines. Our growing royalty portfolio underpins the value of our business.

We anticipate several go, no-go large-scale machine purchase decisions tied to new and existing royalty partners to take place in the next 2 to 3 months and more in the latter half of fiscal 2024. Our REV machine sales continue to be volatile quarter-to-quarter. And in certain quarters, we may sell multiple large-scale REV machines, and in some quarters, not at all. There isn't necessarily seasonality associated with this volatility, but every business runs on their own time lines.

In fiscal 2023, we added 6 new license partners, including notable companies, like Michael Foods, which is a subsidiary of Post Holdings, Bridgford Foods a longtime production partner with the U.S. Army, a major Canadian cannabis company, and Creations Foods, who acquired most of the assets from NutraDried and continue to sell Moon Cheese in the North American market.

We sold 4 large-scale machines this past fiscal year, and we currently have many more large-scale opportunities to pursue. Our sales pipeline includes both possible scale-ups with existing technology partners and new deals with companies working through their initial product development evaluations. There is strong internal optimism, but the reality is we need to execute and deliver on these prospects. If we do, our royalty portfolio will continue to grow.

In fiscal 2023, we generated $11.3 million in revenue, up $300,000 from the year prior, of which $1.5 million was from royalties, up just over $100,000 year-over-year. We also reduced our SG&A cost in fiscal '23 by about $1.7 million year-over-year, yielded a gross margin of 39% and produced positive adjusted EBITDA of $379,000, $1 million turnaround from the year prior.

Over the past 12 months, we completed the installation of 3 new large-scale machines, one in Orto Al Sole of Italy, a second at Dole in Thailand and the third at one of our Canadian cannabis partners. We will have another two come online before the end of February at Bridgford Foods, and a very large snack manufacturer in Japan, respectively. The potential impact of this increase in manufacturing capacity has not yet been reflected in our royalties, and we assume that through fiscal 2024, royalties should improve as these technology partners execute their planned commercial launches.

Now a notable difference to EnWave situation today versus the same time last year is the number of blue-chip partners that have or are in the process of launching commercial consumer products in market. If any of these product launches are successful, we expect several new large-scale machine orders to support the future needed manufacturing capacity tied to growing volume estimates. We are communicating closely with these technology partners and remain optimistic.

Q4 reflected the aforementioned volatility of large-scale machine sales, and we are working to achieve more consistent cadence of machine orders in calendar 2024. That being said, the success of existing technology partners and the growth of royalty revenue should be the focus for investors.

I'll now ask Dylan to summarize EnWave's detailed quarterly financial performance.

[Dylan Murray, executive]

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll be going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR, and all amounts are in Canadian dollars unless otherwise noted. I will make reference to adjusted EBITDA, which is non-IFRS financial measure, so please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP net income, both in the press release and in our MD&A. Also, please note that the comparative period I'll refer to throughout this presentation is the prior year Q4 ended September 30, 2022.

Revenues for Q4 were $1.5 million compared to $2.8 million Q4 2022, a decrease of $1.3 million or 48%. The decrease was primarily due to fewer machine contracts during the quarter. The decrease in revenue was partially offset by third-party royalty revenue, which was $381,000 in Q4 2023 compared to $301,000 in Q4 2022, an increase of $80,000 or 27%.

Royalty revenue for the year was $1.5 million compared to $1.4 million for 2022, an increase of $113,000 or 8%. The increase was predominantly a result of an increase in products sold and produced by our royalty partners. And as our royalty partners grow their businesses and increased capacity utilization on REV equipment alongside new REV installations deriving from new sales, we hope to see material royalty growth over the coming quarters.

As Brent mentioned, there are 5 large-scale machines, which have been recently commissioned or will be commissioned soon, but have yet to reach expected royalty generating potential. Gross margin for the company in Q4 2023 was 29% compared to 39% in Q4 2022. The decrease in margin was due to the production mix during the quarter and machine resale in the comparative period. Gross margin for the company remains healthy at 39% for the year-end [ September ] 30. SG&A expenses, including R&D, were $1 million for Q4 2023 compared to $1.4 million in Q4 2022, a decrease of $405,000 or 28%. SG&A for the year was $5.2 million compared to $6.8 million versus 2022, a decrease of $1.7 million or 25%. We reduced G&A costs as part of the continued focus on managing nonrevenue generating spending.

Adjusted EBITDA is a non-IFRS financial measure. So please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $324,000 for Q4 2023 compared to adjusted EBITDA loss of $27,000 for Q4 2022, an increase of $297,000. Adjusted EBITDA for the year was $379,000 compared to a loss of $681,000 for 2022, an increase of $1 million. The increase in adjusted EBITDA was primarily due to the reduction of SG&A expenses, including R&D, offset by lower margins for the period. We finished Q4 2023 with cash and cash equivalents of $4.2 million and a net working capital surplus of $8.6 million as of September 30. Our balance sheet remains debt-free.

And as previously announced, EnWave's Board of Directors and Executive Management commenced an orderly wind down value maximization process for the NutraDried business segment earlier in the year. In Q2, EnWave agreed to sell NutraDried assets, including trademarks, auxiliary production equipment, select saleable inventory to Creations. Total consideration on our sale of NutraDried assets in the 100-kilowatt unit Creation was USD 2.6 million, of which USD 830,000 was outstanding as of September 30.

In accordance with IFRS 5, NutraDried has been presented as a single amount in the face of the statement of comprehensive income as discontinued operations. During Q4 2023, the company reported net income from discontinued operations of $770,000 compared to a loss of $1.8 million for Q4 2022, an increase of $2.6 million. The increase was a result of the wind down in tax refund in the amount of USD 0.5 million of an estimated total potential of USD 1.2 million tax refund being recognized in Q4 2023. The refund is for the employee retention tax credit, which is a refundable tax credit from the United States government for businesses that were affected during the COVID-19 pandemic.

A $0.5 million tax refund was received subsequent to year-end. As of the date of this earnings call, there has been no further communication from the IRS related to remaining potential tax refund, and the associated receivable has not been recognized as there's no certainty it will be issued.

[Brent Charleton, executive]

Thanks for your commentary, Dylan. Now despite a slower Q4 than we would have liked, we see many opportunities, many of them near term in fiscal 2024 to expand existing commercial relationships in a number of verticals, including the fruit, vegetable, seafood, [ pet treat ], meat snack, military ration, egg product and dairy snack areas, quite a number of verticals that we're commercializing this technology into. We also have the opportunity to convert a number of new companies into royalty paying partners.

We expect our royalty portfolio to grow both in total size and by the number of contributing royalty payers. New REV-dried commercial products have or will be hitting the market with meaningful distribution this year, and we need these products to sell well. We will continue to keep our expenses in check and spend strategically in an effort to stimulate greater revenue generation, and our current cash position will adequately support our business needs so long as we sell machines as internally forecasted.

There genuinely seems to be growing interest now in our stock again, stimulated by a recent capital markets effort, and we intend to continue investing time towards investor outreach and awareness concurrent with expected operational execution.

I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator]

[Operator Instructions] If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail at [e-mail]. One moment please while we pull for your questions. Our first questions come from the line of Eric [ Pizm ] with EnWave.

[Unknown Shareholder]

Brent, Dylan, I just wanted to congratulate you on the royalty growth, which is, as a longtime shareholder, something I've been watching for many, many years. And now that we're firmly above $1 million, Dylan, you referred to anticipating material increases in royalty. Do you guys have internal measures for that? How do you define material internally when you're -- you've really come quite a long way in the last few years for percentage gains. Do you still anticipate single-digit growth on that royalty? Or can we expect double-digit growth for a couple of years before we lower that down?

[Dylan Murray, executive]

Yes, thanks for your question. As a percentage, our -- we still forecast double-digit royalty growth in the coming periods. Our last quarter here, kind of about $400,000 in royalties. So on a go-forward basis, management looks at that as our royalty baseline, if you will, for 2024.

[Brent Charleton, executive]

Yes. I'll just add some additional color to Dylan's response, Eric, in regards to the products that are going to market or have already gone to market. It's -- there's no lag or delay in the volumes that are hitting the market versus, say, partners who typically have sold their products on a business-to-business basis. These business-to-consumer products are [ selling ] the distribution channels, and we should immediately see an influx in royalty growth from the likes of Dole, Calbee, et cetera.

[Unknown Shareholder]

Yes. I mean it's -- that's why I kind of -- I wonder what -- where those royalties can go because that really is a -- it's kind of a new era for the company. A lot of the partnerships that you guys have currently don't seem to have those kind of volumes and means involved with the production. So I mean, can we expect -- how material is material, I guess, but I guess we're just going to have to wait and see it roll in.

[Dylan Murray, executive]

You're exactly right. It's always so hard to predict royalty growth because it's timing based on commissioning of machines and commercial partner success. But we continue to anticipate and project internally that we'll continue to see strong royalty growth as these machines come online.

[Unknown Shareholder]

Is that part of the company being recognized in the pursuits that you've had in the capital markets? Is that something that you and your team focus on because that has always, for me, been a key pillar of the company's future. And we really seem to be at a point where it's going to be lift off here for royalties, and the embedded nature of those royalties is so attractive to the markets. And that's -- is that something you guys are talking about?

[Brent Charleton, executive]

Absolutely. That is a keen emphasis in all of our communications in the capital markets is the royalty portfolio that we have, the strength of our intellectual property and the projected growth in those royalty streams from blue-chip technology partners. This is EnWave with a sort of a clean bill of health without having a subsidiary that was hemorrhaging cash. We've cleaned that up, and we accomplished that in the first half of the year. And then now with what we see in our pipeline operationally, it makes sense for us to spend time to ensure that as we hopefully deliver, folks are watching us.

[Unknown Shareholder]

Yes. Well, again, you've -- I really am looking forward to 2024. It sounds like you've got a lot on your plate. So I wish you all well, and we'll see what you guys come up with. Thanks again.

[Operator]

Thank you. We have reached the end of the audio portion of the question-and-answer session. Now I'd like to turn the call back over to CEO, Brent Charleton, to moderate the webcast questions and provide closing remarks.

[Brent Charleton, executive]

Thanks very much. So there are 3 questions that I'll answer that are listed here. First is a question, any updates with the lawsuit to report referring to ongoing civil litigation with some former management employees of EnWave Corporation.

So the updates that I can provide, which have been publicly disclosed, are that we have come to settlements with 2 of the primary defendants, not including ex-employees of EnWave, and have now received a copious amount of additional communication and evidence to further support our pursuit of justice in this particular case. The court date is now being projected to be scheduled sometime in 2025, given that the primary defendants, the ex-employees of EnWave, changed their counsel halfway through the proceedings here. So they are still under full injunction, can't do anything regarding vaccuum-microwave. And we're happy to continue preparation for the eventual court date.

Second question is, how are you managing production personnel, while waiting for machine orders? I guess, just the inherent volatility of when we're building machines. There's lots to do in-house, and I think we have a lean enough team where we're always kept busy, whether it's on new innovation with some of the processes and refinements in our machinery. And also, we're still installing machines. Like as I said, we have folks that are actually in Japan right now, completing the large-scale installation at one of our partners. They are then scheduled for several visits internationally to current technology partners as a preventative maintenance exercise, paid preventative maintenance exercise.

And then ultimately, the installation for -- going to the next question on the list here, what's the update for Bridgford Foods in the U.S. Army? In that, that 120-kilowatt machine is scheduled for installation in Q2 fiscal. So we'll have our team out in North Carolina, completing that and training up them for the production of cheesecake rations for the U.S. Army to begin. But also Bridgford is currently collaborating with a handful of commercial partners and other folks that are interested in getting into the U.S. Army ecosystem.

And so the next question for Dylan here is, do you break out royalties on your income statements?

[Dylan Murray, executive]

I'm not on the face of the income statements, but in the revenue note, Note 18, we segment the different revenue streams and then additional commentary on royalties in the MD&A.

[Brent Charleton, executive]

Okay. Thanks, Dylan. And then the last question I see here currently on the platform is what is the utilization time of REVworx and how much time through with potential customers?

So the majority of our utilization of that infrastructure has been on the development of new contracts and/or the progress on sales pipeline with folks that have taken manufacture in-house. We have still several material REVworx contracts we're pursuing for fiscal '24. If successful, incrementally speaking, on revenue, it would be a maximum of $1.5 million. So this is not significantly material in terms of top line growth. But as we've stated time and time and time again, is that, that particular facility is more of a sales tool for us to derisk the launch of new products to market and then encourage folks to take again manufacture in-house longer term under a licensing royalty agreement.

We'll wait a few seconds here to see if any further questions come in?

Okay. All right, seeing none, I would like to thank everyone who joined us today for EnWave's Q4 and Fiscal Year 2023 Earnings Conference Call. At this time, you may disconnect. Thank you.